The world according to a $2 trillion investment chief

A former lecturer and acting dean at Harvard University, Haefele is the global chief investment officer at UBS Wealth Management, overseeing policy and strategy for $US2 trillion in assets. He is also always travelling.

Business Insider caught up with Haefele this week at the UBS CIO Global Forum in New York before he set off on another long-haul flight. Europe, the Middle East, and Asia are all on the schedule, as well as frequent trips to the US.

He discussed his biggest fear, China, millennials, and bitcoin.

This interview has been edited for clarity and length.

Matt Turner: How do you see markets right now?

Mark Haefele: We’re getting a lot of questions from clients around the world about how this has been such a long bull market, it must have to come to an end, right? This is something we try and work through with them, and, to cut to the chase, we’re probably still in the middle of the cycle economically. We still have low inflation, we still have corporate earnings growth, we still have central banks providing stimulus into the system, and we have this global synchronised GDP growth going on as well, so things look pretty good from those perspectives, despite all the terrible things going on in the world.

Turner: You’ve said we’re in the middle of the economic cycle. What does that mean for the stock market?

Haefele: The stock market, if you look at it this year, might be a little further in the cycle.

Global stocks have gone up about 14% this year, and we would expect maybe half of that for a decent year, so we’ve recently taken off a little bit of our equity exposure. But bull markets don’t just end for no reason. There has to be something to trigger it, so we spend a lot of time thinking about what those triggers might be.

Turner: What are the risks? What are the issues that could arise that could spell an end to the bull run?

Haefele: I think valuation is probably not our biggest concern right at the moment. Valuations aren’t cheap, but they are also not so exorbitantly expensive like they were in the dot.com bubble, for example. For us, the No. 1 concern is Federal Reserve policy. If they remove too much stimulus too quickly, if they raise rates too fast, that would be a likely cause for the economy to turn down. Basically, it’s this idea that they start to take away the punch bowl.

Turner: How hard is to get a read on what the Fed might do next, given the open positions and the uncertainty over the next Fed chair?

Haefele: You raise a good point, which is that typically when you have transitions, particularly for the chairman of the Fed, the markets need some time to [get used to] the new way the chairman communicates. We’ve seen that with Bernanke; we saw that with Yellen. How, and when, and who the choice around the next Fed chairperson is going to be very important.

That said, really the Fed is probably going to be more constrained by what happens with inflation, and with inflation so low, unless that really starts to pick up, the Fed has the room to be broadly stimulative to the economy and maybe err on the side of dovishness.

Turner: Inflation is a really interesting topic. The iPhone has combined 10 different devices in one, and Amazon just keeps expanding into new areas and dropping prices. How do you see that affecting the economy?

Haefele: Well, I think we have to be very humble about making these assessments, in part because Janet Yellen just went on TV and said, “Yes, we’re still thinking about hiking rates, but what is going on with inflation currently is a bit of a mystery to us.”

You’re absolutely right that there are these tremendous deflationary forces out there, caused by new technologies, and also demographics may be causing changes that we don’t yet understand. We try not to be too philosophical about what’s going on and be more empirical, and keep looking at how inflation is progressing, and the tightness of the labour market, to get a sense in the near term just how constrained the Fed is going to be.

Turner: You mentioned you’ve reduced your equities exposure a little. Where do you see opportunities?

Haefele: Stocks are still a good place to put money, because there are not so many opportunities that are attractive. Bonds are very unattractive, for example. We would still be overweight in global equities at this time. We also look to some pair trades. For example, we’re overweight European equities versus UK equities, because the earnings growth in European equities could still surprise to the upside.

Turner: UBS has a strong presence in China. What do you make of what’s going on on the ground there? There’s a lot of talk of there being a slowdown.

Haefele: We think that there will be a little bit of a slowdown, as the Chinese authorities have gotten confident that they can slow the torrid pace of growth a little bit without the wheels coming off the wagon.

They need to slow it a little bit because there is too much credit growth going on. We don’t think that will derail either the China story or the broader global growth story.

Turner: One thing I wanted to ask about is sustainable investing, because that has been a big focus for UBS. Can you describe what’s going on there?

Haefele: Well, there’s sustainable investing and impact investing, and we’d like to be a leader in both.

Sustainable investing can mean many things, but we’re looking for companies in any industry that are looking toward more long-term goals and improving what they do to further things like the UN Sustainable Development goals. Broadly speaking [the goal is] to leave the world a better place. I think what is important about our approach is that we’re not excluding certain industries from investing in; we’re saying, what are the companies within an industry that focus on this kind of forward thinking? That’s one aspect of it.

The second is impact investing. For us, that has a particular meaning, which is, companies or investments that have an investment return but also have a measurable social return. For us, both of these initiatives on the sustainable side and on the impact side, are very much driven not because we think they are a good idea, but also because our clients really want this.

We’ve also placed an emphasis on women having more of a voice in investing, and we see that in the wider industry, and also millennials, as they inherit more wealth from the baby boomer generation, for both of those demographics, having that kind of double line investing, giving back something to society, is increasingly important.

The last point I would make is that we do not believe that you have to sacrifice returns by investing sustainably or in impact investing. Where we’ve started some of our initiatives on the impact side, what we’ve seen is that it really attracts the best and brightest, both in terms of investment managers, but also some companies say, “Look, I’m willing to partner with you because you have this broader mission. I won’t partner with somebody else.” I think we see deals that others don’t see.

Turner: You mentioned millennials. How are they investing versus their parents’ generation?

Haefele: There are many myths about millennials, that they are more of a “me” generation. This is something that has probably come up since the times of the Greeks or the Romans, that “Oh, these young kids today, they’re more selfish.” In fact, we simply don’t see that.

Jacob Lund/ShutterstockMillennials are more interested than their parents’ generation in having an investment that has a social and an investment return.

They are more interested than their parents’ generation in having an investment that has a social return as well as an investment return. For us, that’s a very important distinction. Other ones, around being more facile with technology, those are probably true, but everyone wants to be able to connect with their investment manager through multiple points, whether it’s face to face, sometimes you want to do it on the internet, sometimes you want to do it on your phone. Those changes are probably a place where millennials lead, but where many others follow.

Turner: One question I have to ask, because it is the topic of the moment in markets, is about bitcoin. What do you make of it?

Haefele: To be a real currency, something has to be a means of exchange, a store of value, and be widely accepted, and I’m not sure cryptocurrencies really fit that to the degree necessary to call them a true currency, especially on the store of value side. I can understand using it for a means of exchange. It is currently in a grey area between government regulations or central banks, and I think as these grow there will be more restrictions put on them, and I don’t see them being the store of value that many people hope they are.

Turner: The technology that underpins bitcoin, the blockchain, seems to have a lot of potential in finance. How big a deal is that?

Haefele: Blockchain is very, very exciting, not just for simple transactions, but also much more complex transactions can be embedded into these blockchains. You could, for example, in the future, your will and testament could be completely executed and distributed via blockchain. That’s all exciting things to come, and will promote efficiency and accuracy.

Turner: One last question. What is it that keeps you up at night?

Haefele: Certainly what happens with interest rates and inflation is No. 1. There are other things, like the North Korea situation, where day to day it is something that hits the headlines and may move markets over the short term, but then the market reprices and normalizes these things out.

I do think there’s something a little bit different about this North Korea crisis, because we are reaching a point where this nation, North Korea, may be able to send missiles to the United States, and that hasn’t been resolved yet with the American people. I think there will be another stage to this. It doesn’t have to be a market event, and it doesn’t have to be resolved in what was recently called an “ugly” way, but it will need to be resolved or accepted at some point.

Turner: Have you been surprised by how quickly the market has repriced?

Haefele: I would say no, not because I’m not some sort of genius or have a crystal ball, but because we’ve seen this repeatedly since the financial crisis — for example, around the Crimean situation, where markets repriced very quickly when some kind of status quo was established.